Zalando Se Ord

Good morning, everyone, and welcome to our Q2 2021 earnings call. Today, I'm again with our CFO, David Schroeder, who will provide you with a brief strategic update, walk you through the financials of the second quarter, and discuss with you our full year 2021 outlook. As usual, this call is being recorded and webcasted live on our Investor Relations website, and a replay of the call will be later available today. David, I will now hand it over to you. Please go ahead.

Thank you Patrick and a warm welcome to all of you from my side as well. Thanks for joining our call today. It's my pleasure today to talk to you about another stellar quarter from a strategic as well as a financial perspective. Our platform strategy is enabling us to play a bigger and bigger role for customers and partners within the European fashion ecosystem and we've set the foundation for continued strong growth in the future. At the same time, we delivered another quarter with exceptional financial performance against a very strong prior year baseline. All this is a testament to the resilience, agility and ingenuity of our Zalando team, who I would like to hereby thank once again for their incredible dedication and support. To recognize the great work done and the challenges we've successfully overcome together during the pandemic, our Zalando team is on staycation this week. That's a collective week off to reset and refresh before we start the upcoming fall winter season, aiming to create many more exciting and memorable moments for our customers and partners. But now, let me please share with you the key highlights. First, we continue to attract exceptional amounts of customers and to engage more deeply with existing ones, as evidenced in our more than 30% active customer growth, as well as new all-time highs in average order frequency and customer spending. This does not only create significant growth opportunities for Zalando, but also for our partners. Our partners capitalized strongly on this growth momentum, residing in a partner program GMV growth of more than 100% year-over-year in the first half of 2021. Second, we remain focused on further deepening the relationships with our customers by improving our core fashion experience and by elevating distinct and marketable propositions such as Zalando Lounge, pre-owned, premium or beauty. We are super excited about the recently announced strategic partnership with Sephora, enabling us to accelerate our multi-year vision to build an industry-leading beauty proposition. As a third highlight and following our announcement at the Capital Markets Day back in March to extend to eight more markets in 2021 and 2022, allowing us to address another 100 million European consumers. We recently launched six new European countries, allowing customers to enjoy Zalando's endless choice, seamless convenience, and tailored digital experience. Fourth, we delivered exceptional financial performance in the second quarter of 2021. We grew GMV by 40% to 3.8 billion euros and achieved a 6.7% adjusted EBIT margin against exceptional Q2 2020 comparables. And last but not least, we are happy to reiterate our upgraded full year 2021 guidance with GND growth of 31 to 36% and revenue growth of 26 to 31% year over year. Thanks to the strong year-to-date performance, we now expect adjusted EBIT in the upper half of our initial 400 to 475 million euro range. While growth rates and return rates are starting to normalize again, we are fully on track to reach our upgraded full year 2021 guidance. As usual, we will now dive deeper into all these highlights during the rest of the presentation. Let's start by taking a closer look at our key platform dynamics, both on the customer as well as the partner side, which continue to show strong traction as pandemic-related restrictions have been gradually lifted from May onwards in most European countries. When looking at our key customer metrics, we saw great progress in the second quarter. We achieved an active customer growth of almost 31% year-over-year, now counting 44.5 million customers across Europe, fueled by ongoing strong new customer acquisition as well as reducing churn rates for existing customers. Customer order frequency reached a new all-time high of five orders per customer over the past 12 months. showing the strong and increasing engagement of both existing as well as new customers on our platform. Average basket size increased slightly by 1.4% year-over-year, mainly driven by ongoing lower-than-normal return rates. As a result of these order frequency and basket size developments, GLV proactive customer continued to grow by 7.8% over the last 12 months. Now, after having a look at our entire customer base, Let us also take a closer look at the behavior of the specific customer cohorts we acquired during the first lockdown last year. At our Capital Markets Day back in March, we showcased the pandemic-induced step change in online penetration and our expectation that online penetration would continue to increase from this higher base post-COVID rather than reverting back to pre-COVID levels. This expectation was supported with customer cohort data from our business. Customers acquired during the first lockdown remained active, also as stores reopened in the summer months of 2020. Looking at the same March-April 2020 cohort and its most recent data, we continue to see that it consistently outperformed the comparable cohort from March-April 2019, also during Q2 2021. These developments once again exemplify that the COVID-19-induced step change in online penetration is proving to be sustainable and that we are able to capitalize on it thanks to our platform strategy. As a consequence of Zalando's continued traction with consumers, fashion brands and retailers are engaging with our direct-to-consumer platform more deeply than ever before to capture the online growth opportunity to the fullest. This is evidenced by the continued strong traction we are observing across all our key partner-facing platform services over the past 18 months. Partner program GMV grew by more than 100% year-over-year in the first half of 2021. While we onboarded more than 500 new partners since the beginning of the pandemic, the majority of our growth was driven by increased stock commitments of existing partners, as evidenced by an ever-growing amount of new and available SKUs on our platform. On top, our partners increasingly leverage Zalando Fulfillment Solutions to ship their merchandise in a customer-centric and cost-efficient manner to customers in our international markets. As a consequence, the number of shipped items with Zalando Fulfillment Solutions during H1 grew by more than 140%. With Connected Retail, we offer brands and retail partners a model that allows them to connect their brick-and-mortar stores to the Zalando platform. By the end of June, nearly 4,700 connected retail stores sold through our platform. To put this into perspective, we were able to onboard more stores in the last two years than Inditex has in total in Europe. Additionally, we launched connected retail in France, Switzerland and Belgium, making it available across a total of 13 markets. Active store churn on the platform remained extremely low, at below 1%. although the commission waiver introduced as part of our corona relief measures for the broader fashion industry came to an end at the close of the first quarter and we returned to full commission in Germany as of June. For us, this is a clear indicator that store owners consider connected retail as a key part of their own omnichannel strategy, also post-pandemic. Last but not least, Zalando Marketing Services, which enables our partners to increase the visibility of their offering, and to build their brand on Zalando also recorded very strong growth of more than 120% in the first half of 2021, following an initial industry-wide setback at the beginning of the pandemic. This strong growth was mainly driven by performance marketing campaigns, which helped partners to drive direct sales on the platform, while services related to branding campaigns picked up as well as brand demand for big branding investments started to rebound. and is expected to gain even more importance in the second half of this year. In concluding the section on platform dynamics, I would therefore like to emphasize again that customer and partner engagement continues to grow strongly, making us more confident that we can play an even bigger role for the European fashion ecosystem going forward, and that we can achieve our ambitious growth targets to reach more than 30 billion GMB by 2025, and to serve more than 10% of the European fashion market long-term. Next to further improving, scaling and geographically expanding our core fashion platform, we will capture this tremendous growth opportunity by further deepening customer relationships through elevating distinct and marketable propositions such as Stalando Lounge, our own premium and beauty. Following our recent announcement about our strategic partnership with Sephora, I would therefore like to take the opportunity today to particularly focus on beauty. Online beauty represents a highly attractive market for Zalando. The European beauty market will grow to a size of about 120 billion euros and its online penetration will increase to over 25% in the next 5 to 10 years from a currently relatively low level of only 11%. Also in beauty, online has made a step change as a result of the pandemic. For us, beauty is a logical next step to unlock our growth potential in the years to come. Beauty allows us to attract new customers, but also enables us to build much deeper relationships with existing customers than a fashion-only destination ever could. Already today, three out of five of our customers also buy fashion products when shopping beauty. At the same time, we can leverage our existing industry-leading infrastructure and capabilities to support our growth ambitions, not just in fashion, but also in beauty. We can access beauty supply via traditional wholesale partnerships as well as our direct-to-consumer offerings partner program and connected retail and thereby enable a broad and attractive selection at high availability. Our logistics network allows us to serve our customers with beauty products all over Europe and our technology and payment platform covers the whole value chain of e-commerce for us and our partners with the ultimate goal to build a truly elevated beauty experience for European beauty customers. And we made strong progress on this journey since the launch of the beauty category at Zalando back in 2018. By now, we are offering customers more than 16,000 distinct beauty products across 10 markets, covering the full beauty spectrum. Our customers can choose from more than 350 brands, including many popular brands from renowned beauty houses like L'Oreal, Estee Lauder, and Coty. Going forward, we will further innovate our beauty experience along two key dimensions. We want to further improve assortment access and we want to offer an even more compelling customer experience. With the recent announcement to join forces with beauty retailer Zephora, we will create an unrivaled online prestige beauty experience. Through the partnership, the attractiveness of our assortment will significantly improve, benefiting from Zephora's prestigious and exclusive beauty portfolio of more than 300 brands, including halo brands like Chanel or Dior. Starting in Germany in Q4 2021, the partnership is set to be successfully rolled out through our partner program to other Zalando markets as of 2022. But great brands and products alone won't be enough to offer our customers a leading online beauty experience. At our Capital Markets Day in March, we already gave you a glimpse of the multi-sensory experience that we envision to create for our beauty customers on Zalando. an experience that incorporates beauty-specific functionality, content, and communication to respond to beauty-specific requirements, such as the need for more advice and product trials. We are very excited about our multi-year vision to build an industry-leading beauty proposition and are accelerating our efforts and investments to push our beauty experience to a differentiated and unique level over the next 12 to 18 months. This concludes our strategic update for today. Let's now turn to our Q2 financials and start with a more detailed look at our top-line growth. Group top-line growth in the second quarter once again came in at an exceptionally high rate with GMB growing by 40% year-over-year. I would like to particularly highlight in this context that when looking at a two-year CAGR, we were even able to accelerate our growth in Q2 quarter-on-quarter and have seen our highest two-year CAGR since the outbreak of the pandemic in March 2020. Growth was supported by a continued strong consumer demand for online offerings, as extended lockdowns remained in place across most markets at the beginning of the quarter and were only gradually lifted over the course of the quarter. The strong performance of Zalando's partner business as well as successful sales events also fuelled our growth in the second quarter. In Q2, partner GMV growth again exceeded overall GMV growth significantly. This also explains to a large degree the gap of around 5.7 percentage points between GMV and revenue growth, which is particularly well pronounced in the DAF region, where the platform transition is most advanced. Now let's take a look at the development of each of our three segments. Our core sales channel fashion store saw GMV growth of 40.3% GMV year-over-year, in Q2 across both regions. Most notably, the Dutch region even outperformed the rest of Europe this past quarter with a very strong GMV growth of almost 44%, particularly driven by our most mature market, Germany, growing well ahead of the group, supported by the success of the platform transition as well as ongoing lockdown restrictions for the first two months of the quarter. The rest of Europe grew strongly as well with 37.1%, GMB growth against an exceptionally strong prior year baseline. Growth was particularly strong in Southern Europe and Eastern Europe, supported by increased marketing investments, ongoing strong new customer acquisition and reduced churn. When looking at a two-year CAGR, we still see rest of Europe outperforming DAF with an exceptional CAGR of 36% in rest of Europe and 35% in DAF. Furthermore, our off-price segment continued with its strong growth trajectory in the second quarter of 2021, recording GMB growth of 39.2% year-over-year, driven by our flash sales destination Zalando Lounge, thanks to a highly engaged customer base. While our outlet business was flat year-over-year due to ongoing restrictions for offline retail. The other business segments followed the positive trend, driven by a particularly strong performance from Zalando marketing services, where we saw strong demand from fashion brands, resulting in revenue growth of more than 120% in the first half of the year. Besides using ZMS to drive sales on the platform by increasing visibility, our partners continue to invest more again in branding campaigns to build their brand equity on Zalando. Let's now turn to profitability. In addition to a very strong growth momentum, we recorded an adjusted EBIT of 184.1 million euros in the second quarter, representing a 6.7% margin. Profitability was supported by a strong top-line performance and low logistics costs, driven by higher utilization rates across our European logistics network and an ongoing return rate benefit. At the same time, we deliberately ramped up our marketing and pricing investments to capture the full demand potential. Overall, quarterly profitability remained below last year's level, mainly resulting from decisive marketing investment cuts as part of our initial crisis response back in spring 2020. However, when looking at the margin for the first half of 2021, as well as the margin development over the last two years, you can clearly see our margin increasing. When looking at the regional profit distribution in our core fashion store segment, we can see that our more mature markets in the DACH region delivered remarkably strong absolute as well as relative profitability, also supported by a higher partner business share, but remained below last year largely to higher marketing investments to fully capitalize on demand opportunity. Rest of Europe profitability decreased, driven by continued overproportional investments into customer acquisition and pricing, to drive growth and market share gains in these countries, which from now on also includes the six additional markets that we launched recently. Off-price and other businesses also increased their profitability both in absolute and relative terms year-over-year. Let me now give you some more color on cost line developments that drove profitability in the second quarter. Our gross margin decreased marginally by 0.2 percentage points year over year in the second quarter, mainly as a result of increased price investments to stay competitive against a highly promotional offline environment as stores reopened as well as as a result of continued business mix changes in terms of category mix and country mix. Our fulfillment cost ratio improved year over year as a result of higher levels of utilization driven by the strong business volumes and improved order economics on the back of a higher average item value and an ongoing yet temporary return rate benefit. Our marketing cost ratio increased significantly by 4.6 percentage points year over year as we stepped up our customer acquisition and engagement investments supported by our ROI-based marketing approach to capture the full demand opportunity. Please also note that we left an all-time low in marketing cost ratio recorded in Q2 last year as a result of our initial crisis response. Last but not least, admin costs improved year-over-year as a result of increasing economies of scale. Turning to cash-related items now, we recorded an increased working capital year-over-year. The main driver behind this development is a relatively stronger increase in inventories and in receivables than in payables, reflecting deliberately pre-poned fall-winter 2021 inbounds to mitigate potential supply chain disruptions, and a generally strong spring-summer 2021 business volume. CAPEX spending year-to-date is comparable to last year. All major projects are on track. We expect the majority of the CAPEX planned for 2021 to materialize in the second half, as CAPEX for our large logistics infrastructure projects is usually back-end loaded. Mainly due to our strong operational performance, we recorded a positive free cash flow of 167.6 million euros for the first half of 2021, up from 39.9 million euros in the prior year period. During the quarter, we saw a cash outflow of 105.7 million euros for our share buyback program. We successfully completed the share buyback at the end of July and have bought back 2.1 million shares and just spent below 200 million euros. As a result, our cash balance at the end of Q2 amounts to 2.3 billion euros. Let's now turn to our full year 2021 outlook. When COVID-19 hit Europe in spring 2020, we experienced a dramatic change in our business environment as well as in our private lives. As part of our decisive initial crisis response, we focused first and foremost on protecting the health and safety of all Zalandos, defended the financial health of the company and made a big effort to become part of the solution for the European fashion industry. Following the initial demand shock, we have by now experienced five consecutive quarters of exceptional performance, fueled by the accelerated shift of consumer demand from offline to online channels. Our platform strategy has allowed us to not just play an even bigger role for customers, but to also create significant growth opportunities for partners. As evidenced by our strong performance year-to-date, we continue to enhance our strong strategic and financial position, which in turn enables us to invest with even more confidence, to realize our long-term vision to be the starting point for fashion, and to capitalize on the tremendous growth opportunity ahead of us. With most of the lockdown measures now being eased across Europe and consumer mobility increasing, growth rates have started to normalize in recent weeks, as expected, compared to the elevated levels achieved during the first half of the year. And these growth rates are approaching now our mid-term target growth corridor of 20 to 25%. Although significant uncertainty remains with regards to the further evolution of the pandemic throughout 2021, we continue to assume a gradual return to the new normal in the second half of the year with some life restrictions remaining in place until the end of 2021. Based on our strong year-to-date performance and our unchanged expectations for the second half of the year, we therefore confirm our upgraded full-year 2021 guidance as outlined in May. For GMV, we continue to anticipate GMV growth between 31 and 36% for 2021, reflecting an unchanged expectation for the second half. For revenue, we continue to forecast that revenue growth will trail GMB growth as a result of the strongly growing partner business and will thus come in at a rate of 26 to 31%. For profitability, we now expect adjusted EBIT in the upper half of our initial range of 400 to 475 million euros, driven by an outstanding top-line performance and continued return rate benefits in the first half of this year. On cap-related items, we maintain our previous guidance on achieving negative net working capital. With regards to CapEx, we now expect to spend around 350 million euros this year and therefore to come in around the low end of our initial 350 to 400 million euro range. While all major logistics infrastructure projects remain well on track and we continue to invest into our logistics and technology platform at full speed, We already see today that some of the CapEx initially expected for 2021 will be shifted into spring 2022 as CapEx is typically more back-end loaded. Let me close this presentation by reiterating that based on our vision to be the starting point for fashion and on our strategy to transition to a truly sustainable platform business model, we are ideally positioned to capture the immense opportunity ahead of us, serving even more customers, building deeper relationships with them, and creating significant growth opportunities for our partners. With that, I would like to conclude our presentation and now turn to Q&A.

Thank you. Now we'll begin our question-answer session. If you have a question, please dial 01 on your telephone keypad to enter the queue. Once your name has been announced, you can ask your question. If you find your question answered before it's your turn to speak, you can dial 02 to cancel your question. Please limit yourself to two questions per person. One moment, please, for the first question. Our first question is coming from Rocco Strauss from Arata Research. Sir, please go ahead.

Hey, good morning, David and Patrick. Two questions for me, please. First is, I mean, we are seeing revenue growth at the likes of, like, Facebook, Instagram, Snapchat, etc., all now being driven rather by prices per ad unit than via impression growth. And with Alanda currently reinvesting the savings that you're likely seeing from lower return rates into marketing, to what extent are we seeing a new normal of marketing as a percentage of sales with a tighter market for impressions? And then secondly, on connected retail, I mean, given that Zalando had waived commissions for partners in the last kind of like 12 months plus, while we are kind of like seeing connected retail already in GMB and the cost for the infrastructure, you know, obviously being captured by EBIT. Could you elaborate on what this actually means in terms of like EBIT impact for the remainder of the year once commissions are no longer waived and maybe more broadly into 2022 as well?

Sure. Yeah, thanks for these two questions. Let me start with the question on advertising. So, yeah, I guess it's pretty apparent that the advertising industry has seen a strong rebound in general, also as some of the other verticals that were really hit hard by Corona returned to the table, for example, travel. And that has driven demand up while supply, I guess, was either flat or even slightly down, given that people also returned to the lives outside of their homes. home or their mobile screen, and that then naturally led to an increase in prices. I think it's important to note, though, that when we think about our marketing investments, yes, obviously these prices play a role, but what we ultimately steer towards is good long-term return on investment. And so when we made our decisions to ramp up our marketing investments in Q2, That's also the approach we took. We looked very closely at the ROIs in the different countries for different categories and then deliberately stepped up the game because we saw good opportunities to earn attractive ROIs on a two to three year horizon. the philosophy that we've employed ever since we started with this ROI-based approach back in 2019, and we are now also intending to leverage that approach going forward. I mean, in terms of marketing investment in the long term, I think we've been very clear at the Capital Markets Day already that as our platform grows, as our starting point vision materialize, we think we will become less and less dependent on external customer acquisition and will much more drive the growth through the existing customer base and therefore you can still assume that over a longer time horizon, marketing cost ratios will trend downwards. The second question on connected retail, I mean, first of all, we are super happy with how this business is developing. I mean, when we saw it take off in the beginning of the pandemic and then also started our support program for partners by waiving commissions, it became clear to us that that can become a key part of our story going forward. And it can also become a key element of how Zalando can play a bigger role for the overall industry. I'm particularly happy that now after the first half, we are already talking about 4,700 stores. Remember that we set a target for the full year to get to around 6,000. So we are almost there yet. And if you look at the pipeline, you can even say in terms of stores that are waiting just to be connected, there's no doubt left that we reached that target. And that I think makes all of us proud. and also shows us that there's still tremendous potential left. What you rightfully point out, however, and that's maybe also something to keep in mind when you look at our gross margin development, while connected retail is contributing to our GMB growth, it's not really strongly contributing to our gross margin or EBIT yet, especially over the past few quarters. since due to the commission waiver essentially we did not earn anything with this program but just incurred costs. That is obviously now gradually changing and so we'll see the impact of connected retail more and more materialized. It's obviously packed that in for our full year Abbott Gardens for this year and I think also for the coming years we've been pretty clear that the platform transition especially through higher margin businesses like Partner Program, like Connected Retail, and like ZMS, will also continue to drive our gross margin and also our profitability overall.

Great. Thanks, David.

So our next question is coming from Volker Boss from Bada Bank. Sir, you can go ahead.

Good morning. Congratulations on the great figures. Two questions. I would like to start with beauty. Sephora, you will go live in the fourth quarter. How is the rollout to all over Europe? Is it all going to happen in 2022 already? Will Sephora offer a beauty product here, a concession model at Zalando? Or how is that structured and the fulfillment? Is it done by Sephora or by Zalando? So, you know, And the second question would be on your distribution setup. Could you please remind us on your plans in regard to fulfillment center network expansion to come second half of next year? Thanks.

Sure. So let's start with the fora. That's for sure an exciting new partnership for us. I think essentially it helps us to do two things. First of all, it will certainly advance the whole beauty category in terms of the assortment that we can offer. As I mentioned during the call, the fora comes with a very attractive portfolio of prestigious beauty brands, also brands like Chanel or Dior that we didn't have access to so far. And so I think it just very nicely complements our existing portfolio. assortment and also makes it even more credible for consumers to shop beauty at Zalando. I think secondly, and that I think is also getting to parts of your question, Zephora will also help us to prove that the platform also works in beauty, right? Because so far the partner program share in beauty is super low. It's in the very low single digits and the deal we struck with Sephora essentially is a deal for the partner program. So all this additional volume will add to the platform volume within the beauty category and for sure will also attract other partners that will understand the power of this beauty platform going forward and that's something we are particularly excited about. In terms of distribution, we'll start with a dropship setup, so Sephora will be shipping the items they list on our platform through their own fulfillment network, but we've already started to engage with them in very constructive talks on how we can bring at least part of this assortment also to Selenium Fulfillment Solutions. because also Sephora understands that it can provide an even better experience for customers if they can shop beauty and fashion products together and also receive one parcel instead of two. In terms of the distribution setup, I think there's no big news this quarter, but I think we had a bigger update with our last quarterly release. So in the longer time horizon, until 2025, we have set up a significant logistics network build-up program to support our growth. I guess it's no surprise that if we aim to 30 billion in GMV by 2025, and we expect a large portion of that, not just in the wholesale, but also in the partner program parts to be fulfilled via our own network, and we need more capacity to also not be constrained in our opportunity. And we just, I think, mentioned that we'll keep adding warehouses over the next few years. I think more specifically we said that in the near term, next to the big fulfillment center going live in the Netherlands, already this year, we'll add more large hubs in France, in Germany, and in Poland to be all started in terms of construction still over the course of the next few months.

The beauty rollout will be happening all over Europe already next year or is it more of a longer term process?

Oh, you mean the beauty roller? Sorry, I missed that part of the question. Yeah, so we'll start with the partnership in Germany in Q4 this year. So I think that's great news for our customers in Germany that they can experience all the benefits for their Christmas shopping, where beauty is a very important category. And then throughout 2022, we aim to broaden and roll out the partnership to all other markets where we sell beauty, which currently is 10 markets.

Thank you very much. All the best. Thank you.

We have a next question coming from Anne Critchlow from Societe Generale. Madame, you can go ahead.

Thank you. Good morning. Thanks for taking my question. I've got three, actually. Firstly, on fulfilment cost for sales, should we expect those to normalise, say, back to the two-year-ago level, or do you expect still some benefit from lower returns in the second half and also scale benefits and logistics? And then my second question is on connected retail, just to ask if you've lost any retail partners while you've ramped up the commission rate. And then finally, looking at conversion, that seemed to be up 30 basis points in the second quarter, which was quite impressive. So I was just wondering what was driving that and whether it was the type of marketing spend you've been doing. Thank you.

Sure. So, yeah, starting with your question on fulfillment costs, I think, yes, we should assume a normalization of those costs going forward. I think, especially if we look back at the past five quarters, our fulfillment cost line has significantly benefited from lower return rates, which were driven by a change in customer behavior, as we now expect a return to normal and also see a return to normal, really, already over the past few weeks. I think we can also expect these benefits to fade and therefore also fulfillment costs to increase again. What we shouldn't underestimate, however, is that what we will continue to benefit from is obviously the high utilization of our network. So I think we've seen those benefits in past quarters and we'll also continue to see it, especially in Q4 this year, where I guess for us the main challenge will be to drive a strong level of growth without a significant amount of new infrastructure. And that obviously typically has a beneficial effect on costs. Now on connected retail, I would keep it brief since we already mentioned during the presentation that less than 1% of connected retail stores churn, so I guess that clearly points continued strong interest of these stores into our platform and for sure makes us very happy. And then on the conversion rate, I think what we mainly saw in Q2 is that there was very strong demand and also I think there were more occasions for customers again to shop and to look forward to. And frankly, that we also had a very successful mid-season sale and start to the end of season sale, where you would typically also expect higher conversion rates than in other periods, since the offer is just very attractive that is presented to customers in-app and on-site.

So we have the next question coming from Olivia Townsend from UBS. But if you can go ahead.

Hi, thanks for my question. So I have two. The first one, I just wanted to clarify on the comments you made about normalising GMV growth over the last few weeks. So does this mean that for Q3 you would expect GMV growth of about 25% year on year? That would be helpful. And if you're able to make any comments about adjusted EBIT2, that would be great. My second question is just on the growth differential between the DAS region and rest of Europe. So I'm just wondering if you are able to sort of disaggregate the difference into higher partner program penetration, longer lockdowns, weather, et cetera, just sort of how we should think about the relative performance of the two regions into H2 and next year as well, please.

Sure, so in terms of additional colour for Q3, I think on growth, I'm probably going to sound a bit repetitive, but what we are indeed seeing is that consumer demand is going back to normal, which I guess in our case still means strong growth, especially if you compare it against the strong prior year baseline, which was still heavily supported by COVID tailwinds. So yes, we are approaching the 20 to 25% target growth corridor again, but we are approaching it from above. And so everything, I would say, as expected. And I would actually interpret our ability to drive this strong growth on top of a strong baseline as a very strong sign of our proposition as a very strong sign that our strategy is working because I still remember that a year ago I had to ask a lot of questions how we think about a potential steep pullback after these tailwinds are over and what I can happily confirm is that we are not seeing that. So we are growing strongly on top of a high base and that makes us very happy and for us also is a great confirmation of the way we think and steer the business. In terms of the second question, growth differential, DAF versus rest of Europe, I think particularly Q2 is a special part of this regard, not only because the DAF region extraordinarily really grew stronger than rest of Europe, but also because obviously these regions had different drivers behind them, right? So if you look at DAS, obviously Germany being the biggest country in the mix in this region, there we had two months of lockdowns in a three-month quarter, so just one month with a bit less tailwind from the pandemic, whereas in some other countries, particularly in the rest of Europe, many of them opened up far earlier than Germany, and that obviously then also meant less pale wind and therefore I think this return to normal just started earlier in rest of Europe than it now started in DACH or particularly in Germany. That for me explains the main difference going forward. We still assume rest of Europe will continue to grow significantly faster than DACH. I mean, now that we also added six new markets and we'll add two more next year as presented at our Capital Markets Day, that's, I think, what you would also expect from us, given the tremendous potential that we have left in those countries where we still have much lower penetration than industrial.

We have another question coming from Simon Erring from Credit Street. So you can go ahead.

Morning, everyone. Just a couple of quick ones. Just to follow up on the previous question about current run rates, presumably weather has been particularly unhelpful for 3Q to date. I'm just wondering if that's kind of also affecting your comments about the recent run rate. Maybe also if you could just talk a little bit more about Sephora. Why is it you need to get these premium brands via Sephora? And what makes them so hard to get hold of? Whether you're just purchasing them. Or do you actually not want to purchase them directly on a wholesale basis and you'd rather do a dropship kind of model?

Sure. So on Q3, I mean, we've not seen a particularly influence of the weather, to be honest. I think, yeah, Q3 is always a quarter that is marked by a warm weather, by vacation, by end of season phase for spring, summer, and then typically winter. You have a period in between the seasons with low attraction. So that's all, I think, a normal seasonal pattern and not something that we would describe as being out of the ordinary. And in terms of Sephora, I think it's not, I mean, I think it's a misunderstanding if you interpret our comments as we work with Sephora to gain hold of these very attractive brands because we have to, it's rather that we do it because it accelerates the growth of our beauty category. So I'm pretty sure that we could have also over time struck relationships with all these brands directly, but for us it's just so much faster and in a way also easier to now onboard them all in one goal and therefore have a much better customer experience already in Q4 and not, I don't know, sometime next year or the year after. And I think that's really the way to think about it. And I think secondly, you should also not forget that working with partners to drive our growth is a key part of our strategy. So it's not like our preferred route would still be wholesale for everything we do. And therefore, I think it also nicely fits into our overall platform strategy.

So our next question is coming from Clément Jeunelot from Brian Garnier. You can go ahead.

Good morning. I've got two questions from my side, if I may. The first one is on marketing spending. You mentioned increased marketing spending in Q2. Is it related to your willingness to market share as much, market share as possible? Or are you also observing a higher marketing cost per ad or per campaign? In other words, is the big hack increasing right now? And my second question is on inflation. Are you currently facing any supply chain issue with your suppliers? And also, are the prices likely to increase in H2? Thank you.

Sure. So on marketing spending, I mean, obviously the primary driver of our marketing spending is to grow active customers and to make sure that our existing customers remain engaged. And we do this because we want to continue to grow our active customer base and then obviously find a great way with our vision to become the starting point for fashion for these customers to do all their fashion and lifestyle shopping, including beauty, on Zalando. And so yes, in the end, it follows this idea to increase our market share and to deepen relationships with customers. When we look at our spending in Q2, I think we should keep in mind that Q2 last year was an all-time low, not only in terms of marketing spending, in a way also in many cases when it comes to the costs incurred for doing marketing on some of these platforms. As we mentioned, I think last year at the same time, for some weeks in Q2 2020, it felt a bit like doing marketing back in the old days with very little competition. And that, yeah, led to exceptionally low marketing costs last year. And now, obviously, as we ramp up our spending and as prices are more normal this time around, leads to higher spending. But most importantly, as I pointed out earlier, our return on investment on these marketing investments still looks very strong on a two to three year horizon. And that's mainly thanks to the strength of our proposition and also to continued reductions in customer churn. On your question regarding inflation, I mean, we haven't seen it to a large degree so far. That's probably also the case because we are, especially in our wholesale business, working in longer buying cycles, right? So much of the volumes that you'll see us sell in fall, winter will have been bought way before. We are obviously right now in charge to buy for next year and yes there is some upward pressure based on increasing raw material prices and increasing shipping costs but I think what we obviously have going against that is our increasing scale and the growing importance our platform has for many of our partners and therefore I'm pretty sure that we'll find a way to mitigate at least part of this effect going forward.

Next question from Michael Benedict from Bloomberg. You can go ahead.

Morning, all. Thanks a lot for taking my questions. Just had a couple. Firstly, how should we be thinking about marketing investment at age two in light of growth slowing somewhat? Should we be expecting the marketing ratio to normalize back to pre-pandemic levels? And then the second one, I wondered if you could give some color on trading by country or by region. I guess my question is, has growth normalized most in regions where restrictions have dropped completely? Or has it normalized most in regions where, for example, shops are open, but actually events and occasions are yet to restart? Thanks a lot.

Yeah, so on the question regarding marketing, I think it's fair to assume for the second half of the year that marketing will be fairly in line with what we've seen last year. So pretty flat year over year. And when we look deeper into QTrading, obviously you would see slightly different patterns across different countries, but nothing to call out extraordinary. So I guess Overall, the normalization, as we discussed, is driven by societies and economies returning back to normal and restrictions lifting, and that's the case across all of our territories.

We have a new question coming from Alu Balmastra from Lidrum. You can go ahead.

Hi, guys. Thanks for taking my question. I just wanted to ask on the progress that you may have seen in the pre-owned category, which you have recently entered, and what kind of consumer interest you are seeing there. And then secondly, on the beauty category, just in terms of your target make long-term between partner program and wholesale, and would it be similar to what you target for the overall business, or 50-50, or any different? Thank you.

okay yeah sure so on pre-owned I think it's still pretty early days as you know but it's a key piece not only of our growth strategy but also of our sustainability strategy and we continue to see very strong traction with our customers so there's not much year over year comparison yet on pre-owned but what we do what we do see is strong quarter over quarter development and I think that's just shows us that there's much more opportunity to come for us and that's why we continue to drive that proposition forward. I think in the last earnings call, for example, we also told you that we actually expanded the pre-owned proposition to six or seven more markets now available across most of our markets in Europe. When talking about long-term partner program targets, I think overall, as you know, we've said that roughly 50% of our GMV will be driven by partners by 2025. We've increased that target compared to our previous guidance at the Capital Markets Day in March this year. Obviously this is a target that we set overall and not for a specific category, but in order to achieve it I guess we would expect all categories to increase their partner share going forward, especially those categories like beauty where I mentioned that our shares are Whether we'll see 50% in beauty, I think, remains to be seen. But, yeah, overall, obviously, we remain committed to that target. And the four hours and the partnership with the truck, I think, is a great way to step change the partner penetration in the beauty category.

Next question coming from Rebecca MacCullen from Satunder. Rebecca, you can go ahead.

Yes, good morning. Just quickly on price investment, you mentioned a level of price investment over the first half. Are you anticipating similar sort of needs over the second half, and is there any particular market where you're seeing that more than others?

Well, I mean, we definitely saw a high level of promotional activity in the market, which is also not surprising in Q2. I mean, many of the offline stores had to remain closed for most of Q1 and also parts of Q2. And then when they reopened, obviously they were sitting on huge amounts of spring-summer inventory that they needed to sell, knowing that the season would come to an end soon. And therefore, yes, we have seen, I think, lots of sales activities, particularly in offline, and to make sure that our proposition remains attractive for consumers, we made sure that we can also offer attractive deals on our apps and premises. Going forward, I think we will probably continue to see elevated promotional activities also in the second half of this year. That's at least our current expectation. It will also again be driven by special events like Cyber Week or Black Friday, which are traditionally all around attractive deals and offers. And therefore, I think that is something that we should expect and also have factored into our plan.

Next question coming from Georgina Johan from JP Morgan. Then we can go ahead.

Morning, everybody. Thank you for taking my questions. I've got a few, please. The first one was just you referenced the working capital position in Q2 and I think with stock position being a bit higher just to ensure availability given some of the capacity issues. Can you just talk a bit about that, you know, whether you're actually seeing any gaps in availability or if it's more just sort of working hard to ensure the availability is maintained, please? The second question was just a follow-up with regards to what you were saying on seeing some inflation starting to come through in conversations with the brands. From what you're hearing from talking to the brands, would you expect to see some of that being pushed through in higher prices for consumers? Are they talking about higher recommended retail prices already, please? And then thirdly, just a clarification question, where you mentioned that you expect the marketing in H2 to be sort of broadly in line with prior year, I assume that you were talking about the ratio there rather than in absolute terms, please. Thank you.

Sure. I mean, the last one is probably the fastest, so I was talking about a ratio, not the absolute amount. Keep in mind that Q3 last year was a quarter where we still ramped up marketing. Q4 obviously saw a very high marketing cost ratio, I think for this year it will be a bit more normalized across these two quarters. I think that's the only additional point I would mention. Then coming to your first question on working capital. Yes, there was predominantly driven by inventories and receivables. Receivables because of our very strong buy now pay later offer, which combined with very strong sales in Q2, obviously then led also to a strong growth in our receivables position. But yeah, I guess it just points to the fact that our default payment products are still highly popular with consumers and also drive demand and conversion and customer satisfaction as well. And therefore that's obviously the price that we are happily willing to pay. On the inventory, we deliberately decided to pre-phone inbounds for the fall-winter season to ensure a seamless season start and also make sure that we are well protected against potential supply chain disruptions. I think the strategy has already paid off because, as you might have seen or read, there are disruptions in countries of origin, for example in Vietnam, where Some players like Adidas or Nike have a major part of their factory footprint. And thanks to the preformance of some of our inbound, I think we are well insulated to mitigate some of these disruptions. And therefore, I'm very happy that we've taken that decision. Keep in mind, though, that for the full year, we maintain our networking capital guidance. So for me, it's rather a quarterly outlier. and not something that changes our overall trajectory when it comes to networking capital. In terms of inflation, I think there's not much more I can add to what I already said. So yes, there is some inflationary pressure that we are taking into account. in our plans for next year. Whether that's going to lead to higher recommended retail prices, I think that largely also differs by brands, right? So I think there's no one right answer to that question. And I guess what also remains to be seen obviously is how consumers might react to these price increases. But it's definitely not something unexpected given the overall inflation environment out there at the moment.

Next question from Nivella Nader from Dutch Bunch. You can go ahead.

Great. Thank you. I have two questions from my end. The first one is on the partner programs. David, if you can just dive in a little bit more, strong growth across all three or four offerings that you now have. How much GMV is now the partner program volume, and how profitable is it? And also on ZMS, if you can give us, you know, how much of the GMV is ZMS revenues? and how profitable has that been, and did that help your margins in any way in Q2, and how would you expect it to help your profitability in the second half? Some color on the profitability elements of it would also be great. My second question is on the current EBIT guidance for the full year. It does imply that the second half margins would then sort of go back to the normal single-digit levels. Is that the right way of thinking? You mentioned that marketing would normalize, but is there any other specific investments that are happening in the second half that are affecting any of the scale benefits? Some color there would be great as well. Thank you.

Sure, lots of questions. Let me try to maybe answer them. as comprehensively as possible. So on the platform, I think we do not comment in more detail on the partner program share on a quarterly basis. But as you know, we regularly update you on this figure at least once a year. I think over the past year, we've even done it a bit more often. But I'm happy to remind you that last time we checked in at the CMD, we were talking about a partner share that had exceeded 20% overall and also actually exceeded 40% in Germany where the platform transition is most advanced. And I think there you can assume that from there on, given the much stronger growth in the partner program than for the business overall, the share has continued to increase. In terms of the profitability impact, also reminding you of our comments from the CMD, what we said back then is that the margin of the partner business overall, so including all the partner-facing services, is already margin-accretive on the group level, but the take rate for the partner business is not yet at a similar level as wholesale, as we are only ramping that up over time. But still expected to get very close in the long term as we approach our long term target margin of 10 to 13% for the group. Now if we look at ZMS, obviously we are super happy with the strong traction that business has seen. It was probably one of the businesses that faced most challenges, especially in the initial months of the pandemic. If you remember one year back, we talked about BMS being almost the only piece of the business not growing at exceptional rates. It's obviously great to now talk about significant growth again and to also see not just strong traction in the current quarter and actually in acceleration if you compare Q1 and now Q2. So Q1 was still growth. Below 100% now, we're talking about growth way beyond 100%, getting us to 120% for the first half overall. And for the second half, we already have a healthy level of bookings as well, especially including also many brand campaigns, which makes us very confident. Now, very long term, obviously, ZMS will play a major role in our growth. profitability profile, since it is one of the highest margin businesses that we offer, essentially monetizing the traffic that we have on our platform at very low incremental cost. And that still remains true. It's helping us today, but not obviously to the extent it will help us once we reach our target to generate advertising revenue at 3% to 4% of group GNV.

Our next question is coming from Christian Zahler from HNA. So you can go ahead.

Hey, good morning, everyone. It's Christian Zahler speaking from Hockenhofer. Just one, a little bit of a technical question from my side. So the reported EBIT in Q2 is 2 million higher than the adjusted EBIT. And that has not been the case for, I don't know, for five years or something. So could you explain the difference, please? And also, What kind of share-based compensation is factored in your new adjusted EBIT guidance in full year 21? Thank you.

Yeah, sure. So as you've actually pointed out, it's definitely not business as usual that our EBIT is higher than the adjusted EBIT. But as you can see also mentioned in our half-year report, this is due to a non-operational income that we generated from subleasing some of our office space in Berlin. So also as we prepare the company for the future of a hybrid working model where our employees will spend some time working from home and some days in the office, we obviously need less office space than if we would still be working fully onsite and that's why we took the advantage to sublease some space at very favorable rates, so a much higher rent than we pay ourselves, and that led to this exceptional item that we adjusted for to make sure that our adjusted EBIT still reflects the underlying profitability of our business, which is the, after all, fashion and lifestyle and not real estate. And then in terms of share-based compensation, What we packed that into our full year guidance is around 60 million of share based compensation and that's also something that we mentioned in the presentation, I think in the footnote for you to be fully transparent.

We have a final question coming from Paul from HSBC, so you can go ahead.

Thank you. Just one question from me. Can you perhaps give more detail on the Q2 gross margin, the moving parts behind that impact, for example, of promotional activity? Thank you.

Well, I'm going to keep that rather brief because I think we've talked about it already several times during this call, but I'm happy to say again that We made some deliberate price investments to stay competitive in a highly promotional environment and also particularly to ensure the success of our mid-season and end-of-season sales. And secondly, I think what you also see reflected in the gross margin is obviously that 4Q2 customer buying behavior was not yet back to normal, so we still saw a higher share of basics, for example, which typically come with a lower gross margin than some of the other products that we sell on our platform, and that together led to a slightly lower gross margin year-over-year.

Thank you. This was our last question. Back to you, Mr. Koffler, for the conclusion.

Thanks everybody for joining and enjoy the summer. And if there are any open questions after this Q2 publication, do not hesitate to contact us. Cheers. Bye-bye.